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World Markets Review for July 2015

Market Commentary

August 2015

World Markets Review for July 2015

Global stocks advanced amid improving economic data in the United States and an easing of the Greek debt crisis. Defensive sectors led markets higher as consumer staples, health care and utilities stocks rallied. Emerging markets stocks declined, weighed down by a sharp drop in Chinese shares and falling commodities prices. High-grade bonds gained from a flight-to-safety trade. The U.S. dollar rose against the euro, the yen and most other currencies.

Index Returns (Monthly)

July 2015

YTD 2015

U.S. Dollar %

Local %

U.S. Dollar %

Local %

MSCI World

1.8

2.5

4.5

6.7

MSCI EAFE

2.1

3.5

7.7

12.6

MSCI EM IMI

−7.0

−4.5

–3.7

1.4

MSCI Europe

3.1

4.4

7.1

12.0

MSCI Pacific ex Japan

−1.2

1.7

−0.6

6.6

S&P 500

2.1

2.1

3.4

3.4

MSCI Japan

0.5

1.7

14.2

18.0

MSCI UK

1.7

2.5

3.8

3.7

Barclays Global Aggregate

0.2

—

−2.9

—

Barclays U.S. Aggregate

0.7

0.7

0.6

0.6

J.P. Morgan EMBI Global

0.4

0.4

2.2

2.2

J.P. Morgan GBI EM Global Diversified

North America

U.S. stocks advanced in July, benefiting in part from a flight to safety. The Standard & Poor’s 500 Composite Index gained 2%, its best monthly return since February. The Nasdaq composite index rose 3%, while the Dow Jones Industrial Average advanced less than 1%.

Generally positive economic data helped buoy the U.S. dollar and kept a lid on commodity prices, which were also hit by concerns about slowing global growth, particularly in China. With everything from precious metals to corn in negative territory for the year to date, the rout has led to fund closures by some commodity trading companies. U.S. crude oil futures ended the month just above $47, slipping 21% on news of an increase in the number of U.S. oil drilling platforms and the signing of a nuclear power agreement between major world powers and Iran, which includes the easing of export sanctions. Gold ended the month below $1,100 an ounce.

Earnings growth for S&P 500 companies in the first half of 2015 was the worst since 2009, according to market data provider FactSet. Energy shares shed the most, falling 8% as crude oil plunged. Exxon Mobil’s revenues dropped 33% and earnings fell 52% in the second quarter, sending its share price down 5%. Chevron slumped 8% as it announced a similarly poor quarter and its lowest quarterly profit in 13 years. The materials sector declined 5%.

Utilities and consumer staples had the best sector returns, gaining 6% each. Consumer discretionary rose 5%, boosted by a resurgent consumer. Online retailer Amazon reported larger-than-expected revenues and a surprise profit for the second quarter, which helped push its share price up 24% and its market cap past that of Wal-Mart. Fast-casual restaurant chain Chipotle and streaming video provider Netflix also saw share price gains in excess of 20% after beating earnings expectations.

Information technology rose 3%. Google advanced more than 20% amid stronger-than-anticipated second-quarter profits and signs it was implementing tighter cost controls. Facebook and eBay also topped earnings forecasts, rising 10% and 11% respectively. But Apple shares fell 7% after its July 22 earnings release and 3% for the month. The company reported a 35% increase in iPhone sales from a year previous, which fell short of some analysts’ estimates, and lowered earnings guidance for the current quarter.

The health care sector rose nearly 3%. Health care tie-ups remained prominent, including Anthem’s purchase of rival health insurer Cigna for $54 billion. The combined Anthem-Cigna entity, if approved by regulators, would serve an estimated 53 million insured. Investors appeared to take a dim view of the merger, however, and shares of both companies declined. Elsewhere in the sector, Israeli pharmaceutical giant Teva agreed to buy Allergan’s generic drugs business for around $40 billion. Shares of Amgen rose 15% as the biotech leader posted better-than-expected second-quarter earnings and raised guidance for 2015.

With more than $430 billion in deals, July was the seventh-busiest month on record for global mergers-and-acquisitions activity, said Thomson Reuters, which also reported that June M&A reached an all-time high of $547 billion. Global activity for the year to date through the end of July totaled in excess of $2.6 trillion — a 41% increase from the same period in 2014 — led by a 66% jump in the value of U.S. transactions.

Gross domestic product for the second quarter was a seasonally adjusted 2.3%, according to the Commerce Department’s first estimate. In addition, first-quarter GDP was revised from –0.2% to +0.6%. But the department also revised down growth figures for 2012–2014 in its periodic review of historical data. Since the last recession ended in June 2009, GDP has grown an average of just 2.2% annually. Quarterly wage growth in the second quarter registered its smallest gain in the 33 years since such data first began being tracked, said the Labor Department. But weekly jobless claims fell to a 41-year low in mid-July, and the June jobless rate was 5.3% as employers added 223,000 new jobs, supporting the view that the Federal Reserve seems on track to commence rate increases in September.

Europe

European stocks rallied amid an easing of the Greek debt crisis. Greek voters rejected the terms of a financial bailout package in a July 5 referendum, raising fears that Greece might default on its debt and leave the 19-member eurozone. But a last-minute compromise with international lenders brought negotiators back to the table and reduced the chances of a so-called Grexit. Debt negotiations continued into August. Overall, the MSCI Europe Index gained 4%.

Signs of improving economic activity, especially in Germany and Spain, also helped boost stock prices. All national markets rose for the month, highlighted by 7% gains in both Switzerland and Denmark. A closely watched gauge of eurozone inflation climbed 0.2% in July. However, the inflation rate remained far below the European Central Bank’s target of 2%, raising investor expectations that the ECB may extend its €60-billion-a-month bond-buying program, which is designed to encourage lending and stimulate economic growth. The eurozone’s unemployment rate stood at 11.1% in June, unchanged from the previous month.

Health care stocks led markets higher, advancing 8%. Shares of Novartis, the largest contributor to index gains, moved sharply higher after the drugmaker received FDA approval for its new heart failure treatment, Entresto. Sanofi shares rallied amid a 68% increase in second-quarter profit, supported by improving sales of multiple sclerosis drug Aubagio. Roche shares rose on positive clinical trial results for an experimental drug to treat bladder cancer. Shares of Bayer and Novo Nordisk also were among the top gainers.

Consumer staples stocks rose 6% as the unfolding Greek debt crisis bolstered demand for defensive stocks. Nestlé shares rebounded in July, advancing 8% as the company defended itself from charges by Indian authorities that it sold noodles containing dangerously high levels of lead. The stock dropped sharply in June after the allegations surfaced. Shares of British American Tobacco rallied after the cigarette maker reported higher-than-expected profits for the first half of the year.

Telecommunications stocks also gained 6%, buoyed largely by M&A activity. Telefónica shares moved higher after the company reported a 70% increase in second-quarter profit, primarily due to recent acquisitions in Europe and Latin America. The Spanish telecom also raised its full-year revenue growth forecast to 9.5% from 7%. Vodafone shares gained 5% for the month as Europe’s largest telecommunications firm reported better-than-expected quarterly sales growth, driven by gains in Africa, Asia-Pacific and the Middle East.

Materials stocks declined 1% and energy stocks were flat. Both sectors were hurt by rapidly falling prices for oil and other commodities. Shares of mining giant Glencore lost 19%, falling to the lowest level since the company’s 2011 initial public offering. BP shares slipped 6%; the oil giant reported a second-quarter loss of $6.3 billion, including a $10 billion pretax charge related to the Gulf of Mexico oil spill. Anglo American, BHP Billiton and Rio Tinto were also among the largest decliners in the index.

In bond markets, the turmoil in Greece, a sharp selloff in China’s stock market and uncertainty about the direction of U.S. interest rates prompted investors to seek out relatively safe assets, including German government bonds. The yield on Germany’s benchmark 10-year note fell 8 basis points to finish the month at 0.69%. Benefiting from positive developments in Greece, Italian bonds enjoyed an even stronger rally, with yields tumbling 50 basis points to end the period at 1.82%. Meanwhile, the euro slipped about 1% against the U.S. dollar.

Asia-Pacific

The MSCI Japan and MSCI Pacific indexeswere both up 2%, with defensive sectors outperforming. Japanese markets have been supported in recent months by strong dividend growth and the Bank of Japan’s stimulus program. However, mixed economic data has led to doubts that the country will continue to grow without further central bank intervention. The yen weakened 1% against the dollar.

Japan’s consumer staples sector increased 9%. Japan Tobacco rose on speculation that proceeds from the sale of its beverages unit would be used to return capital to shareholders via a special dividend. Personal care products maker Kao reported its operating profit grew 22% in the first half of the year, with consumer product sales in Asia picking up. Seven & I’s share price increased on news of solid operating profits from its convenience store segment, particularly the 7-11 brand.

Several Japanese telecommunications companies had strong returns during the month on the expectation of higher profit growth within the sector. NTT Docomo’s fiscal first quarter operating profits increased 12%. Japan’s largest mobile carrier is expecting cost reductions and earnings growth. NTT Corp and KDDI also rose. However, SoftBank fell as shares of its struggling U.S. subsidiary Sprint declined sharply during the month.

Tokyo Electric Power had the highest return in the index. Japan’s largest utility company surged 33% after announcing its profit had tripled in the most recent quarter from a year previous, helped by lower oil prices. Nidec announced record high sales and a ninth straight quarterly increase in operating profits. Japan’s recent tourism boom supported shares of East Japan Railway. Shares of pharmaceutical companies also advanced. Otsuka gained 14% after receiving U.S. approval for a new antipsychotic drug.

Fanuc was the worst-performing stock in the index, shedding 18%. The robotics company cut forecasts after its first-quarter profits and product orders missed estimates. Panasonic retreated after weak fiscal first-quarter results. Although the electronics conglomerate did not lower guidance, investors remain skeptical that the company can meet its lofty targets. Toshiba’s CEO resigned in response to the accounting scandal that has weighed on the business for several months. Shares received a short-term boost on news of the resignation, but were still down 10% in July.

Household spending unexpectedly fell 2%, missing forecasts for a moderate rise. Retail sales increased 0.9%, decelerating sharply from the past two months. Core-core inflation, which excludes food and energy prices, increased 0.6%. Economists remain skeptical that Japan can achieve the central bank’s 2% inflation target by the end of next summer. The unemployment rate ticked up slightly to 3.4%.

Australian stocks rose 4%. Major banks gained, supported by an increase in home loan interest rates in recent weeks. Blood products company CSL gained 14% after clearing regulatory hurdles for its acquisition of Novartis’ influenza vaccine business months earlier than expected. However, metals and mining companies lagged as gold prices sunk to a five-year low. Shares of gold miner Newcrest Mining shed 13%. The Australian dollar weakened 5% against its U.S. counterpart.

Hong Kong–listed equities declined 2%. Hong Kong Exchange & Clearing, which was the best-performing stock through the first half of the year, had the steepest drop in July. The operator of the city’s stock exchanges retreated 23%, hurt by the volatile Chinese market. Macau-based casinos, however, reversed their year-long slump after the government loosened visa restrictions for visitors from the mainland. Sands China, Wynn Macau and MGM China all soared over 20%.

Emerging Markets

Emerging markets stocks were hit by a retreat in commodity prices and renewed concerns about the inevitability of a U.S. interest rate hike in the coming months. Worries about economic growth in China and the stability of the country’s stock market further dampened investor sentiment. The MSCI Emerging Markets Investable Market Indexfell 7%. All sectors ended in negative territory, with energy and materials stocks registering the steepest losses. The technology sector also fell sharply. In emerging markets debt, U.S. dollar–denominated bonds were flat, but local debt (as measured by the J.P. Morgan GBI-EM Global Diversified index) lost ground, weighed down by the depreciation of most currencies.

The MSCI China IMIslid more than 11% for the month. On the heels of steep gains in 2014, stocks have been in turmoil since mid-June on fears regarding the potential for further declines in the country’s domestic A-share market. Chinese authorities stepped in with a series of measures to help stem the market drop, including bans on share sales, casting some doubts on the government’s commitment to reforms and a more open market. Concerns about economic slowdown persisted as manufacturing data weakened. Commodity-related stocks fell sharply. Bank shares also retreated after recent gains and robust profits in late June.

Most other Asian markets fell, with technology stocks weighing on South Korea and Taiwan, which both declined 8%. Samsung Electronics announced its fifth consecutive drop in quarterly earnings amid increased competition from Apple smartphones as well as less expensive models made by Chinese firms. Thai stocks slid further, shedding more than 8% in the face of sluggish economic growth. But Indian equities gained, rising over 2%, as investors seemed to take heart from continued signs of economic recovery. Gross domestic product for the year ended March 31 was 7.3%, the highest level in four years. Infosys shares bounced back as the technology giant issued a more upbeat revenue outlook after a recent rough patch.

Brazilian assets struggled amid weaker economic forecasts and fresh worries about a potential sovereign debt downgrade. Standard & Poor’s lowered the country’s debt outlook from stable to negative, raising concerns that other agencies might follow suit. The MSCI Brazil IMI fell 12%. The sharp depreciation of the real — which lost 9% against the U.S. dollar — also weighed on local debt returns. Brazilian local bonds declined 8% in U.S. dollar terms. Meanwhile, the country’s central bank hiked interest rates to 14.25% to fight stubbornly high inflation, but indicated that it had most likely reached the end of a multiyear tightening cycle. Elsewhere in Latin America, the 2% depreciation of the peso hurt Mexican equities and bonds, which dropped 2% and 1%, respectively. U.S. dollar–denominated Venezuelan debt fell further as oil prices sank.

Several Eastern European markets proved to be bright spots, helped by signs that the euro area’s economic recovery was strengthening, and some evidence of progress toward a new financial bailout for Greece. Hungarian and Polish local bonds posted gains. The 9% slide of the Russian ruble hampered the country’s equity and local bond markets, however: the MSCI Russia IMIfell 6%, while local debt ended 7% lower. Russia’s central bank lowered interest rates to 11% in its fifth cut this year, taking total reductions so far in 2015 to 6 percentage points. Turkish equities and local bonds continued to fall amid political uncertainty following last month’s elections; the lira slipped 3%, bringing its year-to-date losses to 15%. In corporate debt issuance, Zambia sold $1.25 billion in eurobonds to help fund infrastructure development.

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Terms and Definitions

A market capitalization-weighted index based on the results of approximately 500 widely held common stocks.

Dow Jones Industrial Average is a price-weighted average of 30 actively traded industrial and service-oriented blue chip stocks.

MSCI Brazil IMI is a free float- adjusted market capitalization- weighted index that is designed to measure the equity market results of Brazil.

MSCI China IMI is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results of China.

MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization weighted index that is designed to measure developed equity market results, excluding the United States and Canada. Results reflect dividends net of withholding taxes.

MSCI Europe Index is a free float-adjusted market capitalization-weighted index that is designed to measure results of more than 10 developed equity markets in Europe.

MSCI Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of Japan.

MSCI Pacific ex Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of the developed markets in the Pacific region, excluding Japan.

MSCI Pacific Index is a free float-adjusted market capitalization- weighted index that is designed to measure the equity market results across 5 Developed Markets countries in the Pacific region.

MSCI Russia IMI is a free float- adjusted market capitalization-weighted index that is designed to measure the equity market results of Russian securities listed on MICEX Stock Exchange.

MSCI United Kingdom Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market results of the United Kingdom.

MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure results of more than 20 developed equity markets. Results reflect dividends net of withholding taxes.

NASDAQ is a broad-based index that measures all NASDAQ domestic- and international-based common stock listed on the NASDAQ stock market and is calculated using a market-capitalization-weighted methodology.

Represents the U.S. investment-grade fixed-rate bond market.

The J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified is a uniquely weighted emerging market debt benchmark that tracks total returns for U.S. dollar-denominated bonds issued by emerging market sovereign and quasi-sovereign entities. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.

The J.P. Morgan Government Bond Index – Emerging Markets (GBI-EM) Global Diversified covers the universe of regularly traded, liquid fixed-rate, domestic currency emerging market government bonds to which international investors can gain exposure. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of account fees, expenses or U.S. federal income taxes.